TECHNOLOGY ADOPTION, PRODUCTIVITY, AND FIRM SIZE: THE CASE OF ITALY

Matteo Bugamelli, Federico Cingano and Salvatore Rossi

Bank of Italy

Knowledge Economy Forum VII Ancona 17-19 June 2008

BANCA D’ITALIABANCA D’ITALIAE U R O S Y S T E ME U R O S Y S T E M

Why talking about Italy here?

Not (just) because we are in Italy!If we are interested in understanding what

drives economic growth in an advanced country…

… the Italian economy is an interesting case in point…

… since it has been growing much less than its partners in the last decade

As we’ll see later, lessons can be drawn for emerging countries too

The disappointing performance of the Italian

economySince the second half of the ’90s: GDP growth has dramatically slowed down in absolute and comparative termsHours worked increased but labour productivity stalledTFP drove down labour productivity

What could explain Italy’s growth and productivity crisis?

Two “revolutions” have shocked the world economy in the last 20 years: ICT and globalizationThe Italian economic structure shows a distinctive anomaly in the advanced world: dimensional fragmentation (firm dwarfism)Industrial districts (clusters) were in the 70s and 80s an original response to the trade-off between the need for flexibility and that of scale economiesSince the mid-90s small size, even within clusters, is delaying the adjustment of most firms to the new technological and market environment

Empirical evidence (micro) on tech adoption, innovation

and R&D [1]

Pagano and Schivardi (2003) show that growth across European countries is positively related to firm size, especially in industries with economies of scale and high R&D intensity

Fabiani, Schivardi and Trento (2005) show that Italian firms are more likely to innovate and invest in ICT:

1. when large2. when share of skilled workers is high3. when connected with a neighbouring, large

firm4. when adapt organization structure to ICT

Empirical evidence (micro) on tech adoption, innovation

and R&D [2]

Hall, Lotti and Mairesse (2008) show, based on a large sample of Italian SMEs, that: firm size and international competition have a positive effect on R&D effortR&D intensity has a positive and significant impact on the likelihood of introducing both product and process innovation

Empirical evidence (micro) on tech adoption, innovation

and R&D [3]

From 2007 Bank of Italy’s survey on manufacturing firms:

25.5% of firms has an internal R&D department, but… …more than half of R&D dep. are very small (≤5 employees); only a fifth has more than 15 employees Share of firms with R&D dep. increases with firm size

Has this situation recently changed?

In the last 3-4 years restructuring and market repositioning by some Italian firms may have started (Bank of Italy 2006, 2007)

A great heterogeneity within each sector is evident: specialization seems less relevant than expected, there are winners in traditional sectors and losers in high-tech ones

Evidence from Bank of Italy’s 2007 survey on manufacturing

firmsExport and value added growth in recent years has been higher for firms: more propense to ICT adoption and use that complemented ICT technology with highly skilled workers (human capital), in particular white-collars that complemented ICT technology with re-organization, in particular toward more horizontal structuresFirm size matters for all those activities: actually, it is (slightly) growing

Industry “tertiarization” as a form of competitive advantage

The “winners” are also those firms where innovation takes the form of a “tertiary” supporting activity, like marketing, branding, customer service

In a research at the Bank of Italy we have shown that these factors have been increasingly important in recent years (eg. branding)

Devoting care and resources to these activities is related to firm size

Innovation is crucial (private and public R&D, patents)

Italy’s R&D/GDP expenditure is slightly more than 1%, just as it was ten years ago, much lower than EU-25 average (1.8%), very far from the Lisbon target (3%) The contribution of the private sector to R&D is low (50%, as against 60-70% in main EU countries), due to small firm sizeItaly’s innovation output (47 patents per million inhabitants) is largely below EU15 average (79)

Policy implications for Italy [1]

Whatever side of the problem one looks at, firm size stands at the root of the Italian growth and productivity crisis Dynamics matters: one would want to see more small firms, particularly start-ups in innovative sectors, but also successful SMEs in traditional sectors, rapidly evolving into medium and large firms… …possibly shifting their sector specialization towards the neighbouring one with a higher technological intensity…

Policy implications for Italy [2]

Dimensional growth of firms is hampered by many socio-political factors. Among others:

1. Traditional family-ownership model2. Scarcity of financial intermediaries

specialized in promoting firm growth (venture capital, private equity)

3. Diffused tax evasion and elusion in the presence of high tax rates, favoured by small size

4. Very intrusive red tape: being small helpsNo role for macroeconomic policies. Structural policies are needed, in many areas

Lessons for emerging countries? [1]

As we have seen, insufficient firm size is crucial in explaining the Italian productivity crisis

Italy inherited from the past a dimensional structure of its productive system more similar to that of an emerging country…

… which is delaying and making it difficult to adjust to the the two world Revolutions (the change of technological paradigm and the advent of globalization)

Prima facie such experience may seem irrelevant from the point of view of a less advanced economy, which has to adopt existing technologies and to develop its internal market…

Lessons for emerging countries? [2]

… in particular, for countries emerging from transition private SMEs are the necessary antidote to the old model of large and inefficient state-owned firms

Yet, even those countries should be forward-lookingAs soon as the private sector has consolidated, and

the economy has reached a middle-income level of development, how to stimulate the endogenous dimensional growth of firms should become a policy priority

Otherwise, as the recent Italian experience shows, an economy about to approach an advanced development stage may enter a “smallness trap”

BANCA D’ITALIABANCA D’ITALIAE U R O S Y S T E ME U R O S Y S T E M

R&D expenditure (% GDP)

2000 2005EU27 1.86 1.84Germany 2,45 2,48Spain 0.91 1.12France 2.15 2.13Italy 1.05 1.10Netherlands 1.82 1.73Sweden .. 3.89United Kingdom 1.85 1.76

Branding(as % share of sales)

2000

Own brand products

No brand products

Other brand licence

Own brand products

No brand products

Other brand licence

Industry 20-49 employees 63,3 25,3 10,8 64,3 23,5 11,7 more than 50 employees 74,3 20,7 5,0 77,9 16,4 5,7 Total 72,1 21,6 6,2 75,2 17,8 6,9

2006

GDP and productivity, 1981-06

Average firm size, 2005

Manufacturing Construction  Wholesale and

retail tradeTOTAL

France 14,30 3,48 4,33 5,97 Germany 34,35 6,63 9,58 11,41 Italy 7,39 1,85 1,42 2,63Netherlands 15,91 5,05 7,14 8,48

Spain 11,21 5,56 3,12 4,36 Sweden 11,75 3,26 4,05 4,34 UK 20,45 5,42 11,98 10,57